Some pitfalls with non-disclosure agreements

The retail industry hasn't stood still in acquisition land last year either. How does such an acquisition process begin? In nine out of ten cases, it starts with a non-disclosure agreement. At first glance, this does not seem to be a very complex document, which is often taken lightly. But it can be quite tricky. What are the pitfalls?

1. Delineation of "Confidential Information.

First, the question of what information to be provided qualifies as "Confidential Information. For the buyer in particular, it must be clear which information is considered confidential, for the simple reason that it must be known to him when a breach occurs. Against that background, the potential buyer will want to limit the term "Confidential Information" to only information marked as such, as the potential seller will want all information he provides to be considered confidential.

And how to deal with information provided orally? A practical solution is to include that this information only falls under the scope of the concept of "Confidential Information" if the information is confirmed in writing within a certain period of time.

To limit the potential buyer's exposure, it is important to include exceptions, for example, by establishing that publicly accessible information is not covered by the term "Confidential Information" (even if the information provided does not become publicly accessible until after the confidentiality agreement is signed).

2. Circle of data subjects with access to the confidential information.

A second point of attention is the circle of people who have access to the confidential information. One way is to have every person involved sign a confidentiality declaration, but certainly in the somewhat larger takeovers this is not very workable. A more pragmatic solution, often used in practice, is for the potential buyer to ensure that the persons involved within his organization and those he engages behave in accordance with the confidentiality agreement. If one of them blurts out, the potential buyer is liable.

It is also important to consider third parties, who may have access to the confidential information but are not part of the potential buyer's organization. Think of consultants. Viewed from the seller's interest, it is advisable to stipulate that any breach by these third parties will be attributed to the buyer.

3. Consequences of violation

Viewed from a seller's interest, it is advisable to include a penalty clause in the non-disclosure agreement. If this is missing, a non-disclosure agreement can quickly prove to be 'toothless'. A potential seller will then have to prove that there has been a breach of confidentiality and he will have to prove his damages numerically. The point is that when non-disclosure agreements are breached, the effects are almost never fully quantifiable. A penalty clause provides the potential seller with the necessary comfort in that it has a certain preventive effect. Incidentally, the exact wording of a penalty clause requires the necessary attention because under circumstances it can block the possibility of compensation.